It is widely acknowledged that we are not on track to achieve the Sustainable Development Goals (SDGs). For four-fifths of the world’s population living in the Global South, this implies continued challenges in addressing basic needs. The United Nations estimates that nearly 600 million people will still be living in extreme poverty in 2030, more than half of them women. Achieving the SDGs will require tremendous investment, with financing needs in the Global South estimated between $2.5 and $4 trillion annually. Governments alone cannot bridge this gap; the least developed and low-income countries need to invest around 16.1% of GDP to make good progress on just five key SDGs—education, health, water and sanitation, electricity, and roads. While philanthropic capital can, of course, help, there are limits to what traditional grant-based approaches can achieve, especially in the face of shrinking global aid budgets.
In Unlocking Collective Impact in the Global South: How Funders Can Catalyze Change, we wrote about how Collective Impact (CI) can help funders increase effectiveness by aligning efforts with others. CI is a powerful tool to maximize the value of each philanthropic dollar through collaboration and shared measurement. However, as discussed above, we also need to widen the total pool of resources available for development. Market-based solutions (MBS) are one way to do this. By using philanthropic capital in a catalytic way, MBS can unlock private sector investment and entrepreneurship to drive impact well beyond the life of a grant.
Market-based solutions are a broad set of approaches that leverage market forces to achieve social or environmental good. MBS include policy instruments, market-based business models, and other actions to address specific market barriers. Ultimately, these are all in service of enabling poor households to buy essential products and services from the private sector, while supporting private sector actors to deliver them profitably.
MBS aims to make markets fairer and more inclusive, so that all households—including those usually considered too poor to be valuable—are treated as paying customers with aspirations, preferences, and agency. To achieve this, we first need to engage with these potential customers to understand, from their perspective, -their lived experiences, unmet needs and the barriers they face, and the outcomes they desire for themselves, their families, and their communities. These insights can inform how we support private sector actors, or businesses, to design and profitably deliver a diverse range of responsive and affordable products.
Importantly, when we speak of businesses, we are not always referring to large corporations, though they often have a role to play. In the Global South, many essential products and services are delivered by micro, small, and medium enterprises (MSMEs), many of whom are informal and also financially vulnerable. Supporting these actors is critical to building locally grounded, responsive, and resilient markets. For example, in India, the market for activity-based learning (ABL) for young children was dominated by small enterprises and start-ups serving relatively affluent private schools. FSG saw the potential to extend these offerings to affordable private schools (APSs) that cater to lower-income families. By working with MSME providers, schools, and parents, we helped nine ABL providers reach over 750 APSs and impact more than 150,000 children. In another example of a successful MBS initiative, the Uganda Sanitation for Health Activity (USHA, 2019-23) saw that the key agents of change in the rural market-based sanitation model were individual masons and community health workers.
When thoughtfully designed and facilitated, MBS can deliver a range of meaningful outcomes for funders, enterprises, and the communities they aim to serve.
Reach the “overlooked middle”: Many developing countries have large lower-middle income populations, such as auto rickshaw drivers, pushcart vendors, and others, who have some ability to pay but are underserved by markets geared towards richer customers. While most government and philanthropic actors focus on the lowest income groups, the overlooked middle can be effectively targeted by MBS. They have some ability to pay and often a high desire to purchase things that matter to them. We can unlock a lot of progress on the SDGs by making markets work for this middle group.
Target subsidies productively: When the overlooked middle cannot satisfy their needs through markets, they may go to the same places as lower-income groups, including subsidized channels. By expanding markets to the overlooked middle, we can ensure that subsidies are reserved only for those who truly need them. Further, market-based business models can often design cheaper and more accessible products. This reduces costs not only for paying customers, but also for donors and government stakeholders who procure products for subsidized distribution.
Create sustained impact: When philanthropic funds are used to build markets for good, the emerging system can deliver impact well beyond the life of the original grant. This frees up funds to take on other complex challenges.
Generate new employment: As market-based business models strengthen, more MSMEs flourish, generating more and better-quality jobs.
Why do markets need philanthropic support?
Despite their potential, markets often don’t work well for low and lower-middle-income households. Many barriers stand in the way of what, at its heart, should be a simple exchange between a buyer and a seller. Most commonly, a family does not find an affordable product, either because their income is too low or because businesses cannot deliver it profitably.
Of course, there’s usually more going on beneath the surface. A family might not find a product that meets their needs, as products and value chains are typically designed around richer, more valuable customers. Or, a family could afford a product but feel compelled to prioritize their limited income towards other urgent expenses. Or, they can’t find credit. On the business side, the operating model may not be fit-for-purpose. An enterprise may not know how to reach these newer customers efficiently or make a convincing pitch to them. The broader ecosystem may have some costly barriers, like high import duties, unsupportive policies, or inadequate infrastructure. Or there may be mental model barriers, such as perceptions that low-income households or small enterprises may not understand the benefits of a new product or model, may not be interested in it, or worse, may not deserve it.
At this point, it’s worth wondering why philanthropic funds should be used at all to address these challenges. Are they not entirely within the domain of the private sector? In truth, many of these barriers are too structural or widespread for any single enterprise, even a large corporation, to address on its own. Businesses may have legitimate concerns about the viability of hard-to-serve markets and may hesitate to experiment without clear signals or early support. This is where philanthropic capital can play a catalytic role by fostering demand and supply, and building enabling ecosystems.
What can funders do?
Funders are uniquely positioned to step in and address challenges that are too large or complex for any single business to solve, or for government to solve quickly enough.
Embrace market-based solutions: Firstly, funders should consider MBS as one key approach in their strategy, in addition to traditional grants. MBS helps expand the pool of resources available for development and can create sustainable impact at scale in a leveraged way.
Address large, structural barriers: Funders can help address barriers that individual actors will struggle to solve. Firstly, they can help build a real and in-depth understanding of market systems. Very often, we think of non-affluent customers as a monolith, when they actually include various unique segments with differing needs and preferences. We also often think of MSMEs within an industry as a monolith, when they include various segments that are interested in serving low-middle income customers, are critical to the overall value chain, and are also struggling financially. Funders can help develop these segmented understandings so that key challenges are understood and impactful solutions can be designed.
In addition, funders should also help address broader ecosystem barriers. For example, they may invest in developing financing solutions tailored to low- and middle-income customers, or work with government agencies to build the case for more supportive policies. All of this can have an exponential effect on markets, and industry actors may struggle to drive these efforts directly.
Build partnerships: Market-building efforts necessarily require partnerships. Different funders and grantees need to work collaboratively, given the scale and diversity of ecosystem interventions. Interventions may need to engage across customers, enterprises, associations, and government agencies, and this requires diverse skills and relationships. Businesses across a value chain may also need to coordinate a lot more. Funders can play a helpful role here, too. Funders can support pre-competitive alliances to address common needs, including industry standard setting and knowledge sharing. Funders have a much greater chance of shifting systems if they join hands. They may find their individual convening power to be limiting if they pursue systems change alone.
Underwrite experiments and support learning: MBS interventions wade into complex market systems. Low- to middle-income customers and struggling enterprises may be hesitant to invest their hard-earned money in a new and untested venture. Funders can design and support pilots to encourage experimentation, ensure that learnings are used to refine strategies, and engage with system stakeholders to build greater confidence.
The Growing Livelihood Opportunities for Women (GLOW) program aims to address several barriers faced by women in the Indian labor market, including gendered social norms, i.e., mental model barriers. The program began with rigorous, deep engagement with the impacted communities and the systems around them, translating insights into business model shifts, and then piloted them to start shifting mental models over time, especially among potential employers.
In the early childhood education case mentioned earlier, the small ABL enterprises had limited capacity to explore the APS market on their own. They required external support to understand APSs, the families they served, and how to meaningfully tailor their offerings. Philanthropic funders invested in these public goods and supported FSG’s market facilitation efforts to help translate the information into a new business model. FSG also facilitated pre-competitive collaboration among the nine ABL providers, encouraging them to share non-confidential operational insights, ultimately benefiting each of the participants.
In the case of USHA, external support was used to build a segmented understanding of customers, design a contextually appropriate menu of toilet products, and a locally-led marketing and delivery strategy. The Uganda-based program team stitched together partnerships with relevant on-ground actors, including local government officials, and invited community health workers, masons, and others to play informed roles. Thereafter, the program ran a closely coordinated one-year pilot and used learnings to refine the model. Without this external support, it would be hard to imagine a vibrant, rural Ugandan market-based sanitation system coming to life.
Market-based solutions are not a silver bullet, nor a replacement for traditional approaches. They cannot address some challenges, such as trafficking or gender-based violence. And they cannot target households that do not have the ability to pay even the lowest price point. However, given the scale of development needs in the Global South, MBS offers an impactful, high-leverage way to deploy philanthropic capital to unlock private investment. Funders and other actors working in the Global South should incorporate market-based solutions to help widen our development resource pool and build pathways for sustainable, large-scale impact.